Responsibility Centers

What is a responsibility centers?

In simple words: an organizational unit for which a manager is made responsible. Examples: A specific store in a chain of grocery stores. A work-station in a production line manufacturing automobile batteries. The payroll data processing center within a firm.

Attributes of a responsibility centers

It is like a small business, and its manager is asked to run that small business & preserve the interests of the larger organization. Goals for the center should be specific and measurable. Should promote the long terms interests of the organization and should be compatible with other responsibility center activities.

Nature Of Responsibility Centers

It exists to accomplish one or more purposes, termed its objectives. It receives inputs in the form of Materials , labor & Services. It transforms inputs into outputs.

Inputs

Work

Output

Capital

Setting up of Res. Centers

Organization

Marketing Marketing Manager Marketing budget

Finance Finance manager Finance Budget

R&D R&D Manager R&D Budget

Production Production Manager Production Budget

HRD HRD manager HRD Budget

Types of Responsibility centers

Revenue center Expense/cost center Profit center Investment center

Revenue center
In a revenue center output is measured in monetary terms. They do not have authority to set selling prices. Typically these are marketing or sales units. Actual sales or orders booked are measured against budgets or quotas, and the manager is held responsible for the expenses incurred directly within the unit

Profit Centers
When a responsibility centers financial performance is measured in terms of profit the center is called profit center. Managers of profit centers control both the revenues and costs of the product or service they deliver. The manager of the profit center should be free to make decisions regarding purchases of materials economically, product mix, methods of manufacture and utilization of labour and equipment etc.

Advantages of profit centers

The quality of decision may improve because they are being made by managers closest to the point of decision. The speed of operating decisions may be increased since they do not have to be referred to corporate headquarters. Headquarters management can concentrate on broader issues. Managers subject to fewer corporate restraints are freer to use their imagination and initiative.

Advantages of profit centers(cont.)

Profit consciousness Enhanced since managers who are responsible for profits will constantly seek ways to increase them. Profit centers provide top management with a readymade information on the profitability of the companys individual components.

Difficulties with profit centers

Decentralized decision making will force top management to rely more on management control reports than on personal knowledge of an operation. If headquarters management is more capable than average profit center manager, the quality of decision made at unit level may be reduced. Friction may increase because of arguments over various points.

Difficulties with profit centers(cont.)

Organization units that once cooperated as a functional units may now be in competition with each other. Divisionalization may impose additional cost because of the additional management staff personnel, and record keeping required, and may lead to redundancies at each profit center.

Examples of profit center

Functional units Marketing Manufacturing Service and support units Other organizations

Expense/Cost Centers
Responsibility centers whose employees control costs. Do not control their revenues or investment level. Examples: Production department in a manufacturing unit, a dry cleaning business. Two types of costs: Engineered: Discretionary: